Canadian Income Taxation, 20192020 22Th Edition By William Buckwold – Test Bank
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Sample Test
Chapter 03
Liability for Tax, Income Determination, and Administration of
the Income Tax System
Multiple Choice Questions
1. Joe
is a Canadian citizen. In March of 20×1, Joe was transferred to the United
States by his employer. His wife and child moved with him at that time. Joe
chose not to sell his house, and instead, now lends it to his extended family
during the winter months when they visit Canada from overseas. Joe has five
weeks of vacation each summer, at which time he and his wife and child return
to Canada and stay in their house. Joe did not cancel his country club
membership so that he can golf with his friends on his vacations. He did close
his bank accounts, however. Which of the following statements is true?
A.Joe is a Canadian citizen, and will therefore, automatically be considered a
Canadian resident for tax purposes.
B. Joe no longer resides in Canada, and will therefore, automatically be
considered a non-resident of Canada.
C. Joe is considered a part-time resident of Canada for the five weeks he
vacations in the country.
D. If
Joe is considered to have a continuing state of relationship with Canada, he
might be a resident for tax purposes.
Blooms: Remember
Blooms: Understand
Topic: 03-07 Resident
Individuals and Corporations
2. Of
the following individuals, which would not be
considered a full-time or deemed resident of Canada for the entire 20×1
taxation year?
A.John lived in Canada all of his life prior to moving to Germany in 20×1,
where he was assigned to a seven-month assignment to set up the international
operations for his Canadian employer. He did not sell his home on Vancouver
Island, as his wife and children remained in Canada for work and schooling
reasons.
B. Marie is a Swiss citizen who lived in Canada from February to October
of 20×1. While in Canada, she joined the local fitness club, gained part-time
employment, and opened an account in a Canadian bank.
C. Prasham
is a citizen of India, where he has lived his entire life prior to moving to
Canada on April 30th, 20×1. Upon arriving in Canada, he began full-time work and
purchased a home.
D. June moved to Canada three years ago from the United States, and has
maintained her American citizenship.
Blooms: Remember
Blooms: Understand
Topic: 03-07 Resident
Individuals and Corporations
3. Section
3(a) of the Income Tax Act includes which of the following?
A.Income from: employment, property, and capital transactions.
B. Income from: employment, property, business, and capital transactions.
C. Income from: business, other items, and capital transactions.
D. Income
from: employment, property, business, and other items.
Blooms: Remember
Topic: 03-13 Net Income
for Tax Purposes-The Aggregating Formula
4. Which
of the following type of payment is NOT subject to Canadian withholding tax
when paid to a non-resident?
A.Dividends
B. Interest
paid to an arm’s length party
C. Pension benefits
D. Registered retirement income fund payments
Blooms: Remember
Topic: 03-08 Non-Resident
Individuals and Corporations
5. Regarding
taxation years, which of the following statements is TRUE?
A.Corporate taxpayers must use the calendar year as their taxation year.
B. The taxation year for an individual taxpayer ends on April 30th.
C. Individual taxpayers may choose any twelve-month period as their
taxation year.
D. A
corporation may have a taxation year less than twelve months during a year the
corporation is formed, dissolved, or is granted a change in its year-end.
Blooms: Remember
Topic: 03-15
Administration of the Income Tax System
Short Answer Questions
6. Your
neighbor, Mrs. White, has heard that you are studying personal tax. She has
come to you with her financial information for 20xx. In 20xx, Mrs. White had
employment income of $40,000, property income of $3,000, a business loss of
$22,000, an allowable business investment loss of $5,000, income from an RRSP
withdrawal of $2,000, and a capital loss of $40,000 on the sale of shares in a
public corporation.
Mrs. White hopes that her losses will result in a net income for
tax purposes of $0.
Required:
1. A)
Determine Mrs. White’s net income for tax purposes in accordance with Section 3
of the Income Tax Act.
B) Based on your answer in Part A, explain to Mrs. White why she will or will
not have a tax liability this year, assuming that her taxable income will be
equal to her net income for tax purposes.
C) How would your answer change in Part A if Mrs. White realized a taxable capital gain
of $30,000 in 20xx?
|
Segment A: (Employment) |
$40,000 |
|
(Property) |
3,000 |
|
(Other – RRSP) |
2,000 |
|
Segment B: |
0 |
|
Segment C: |
0 |
|
Segment D: (Business loss) |
(22,000) |
|
(ABIL) |
(5,000) |
|
Net Income for Tax Purposes: |
$18,000 |
1. B)
Mrs. White does not have the NITP of $0 that she had hoped for, as she is
unable to use the capital loss (since she had no capital gains in the year).
(The potential to use carry-over losses is not addressed at this stage of the
course.)
C) If Mrs. White had realized a taxable capital gain of $30,000 in 20xx she
would have been able to apply an allowable capital loss of $20,000 ($40,000 ´
.5). This would add $10,000 to her income, resulting in a net income for tax
purposes of $28,000.
Blooms: Apply
Topic: 03-13 Net Income
for Tax Purposes-The Aggregating Formula
7. George
and Gina Anderson, (Canadian citizens), moved to Europe on August 15th,
20×1 to open and incorporate a café in a small Italian village. Prior to
moving, George earned $65,000 in 20×1 as a computer programmer and Gina earned
$67,000 in 20×1 as a registered nurse. (The couple did not have any other
income besides their salaries prior to moving.)
They are both in their 60s and plan to retire in Italy, which is Gina’s
birthplace. They sold their home prior to moving to Europe. As the couple only
expects to return to Canada every second year, they cancelled their bank
accounts and driving licenses. Their café was successful in 20×1 and earned a
pre-tax profit of $25,000 by year’s end.
Required:
Determine the residency status of George and Gina and their café
for Canadian tax purposes in 20×1 and discuss the Canadian tax treatment, if
any, of their personal and business income. (Assume there were no assets with
realizable gains upon their move.)
George and Gina would be considered ‘part-year’ residents (or
‘residents until August 15th‘), since they severed
their ties with Canada prior to moving. When filing their Canadian tax returns,
they would only be liable for tax on their earnings prior to leaving Canada in
20×1.
The café is not a Canadian resident. It was not incorporated in
Canada, and its central management and control is not exercised from within
Canada. Therefore, the café is not required to file a Canadian tax return. The
income would be subject to Italian tax laws.
Blooms: Apply
Topic: 03-07 Resident
Individuals and Corporations
Topic: 03-08 Non-Resident
Individuals and Corporations
8. Allison
Hill moved to Canada on April 30th,
20×8. She was born and raised in Belgium and moved to Canada to start a career
in architecture. She earned $45,000 from May to December in 20×8 from her new
employer. Allison earned $10,000 of employment income from January to March in
20×8 while still living in Belgium. She also received $1,000 in dividends in
March, 20×8 and $1,000 in dividends in September, 20×8 from stocks in a
European corporation. Allison’s parents sent her a cheque for $2,000 as a gift
for her 25th birthday in August, 20×8.
Required:
a) Determine Allison’s residency status for Canadian tax
purposes for 20×8.
b) How much income is Allison required to report on her T1 tax return for the
20×8 taxation year?
c) Explain why any items have been excluded from your calculations.
9. a)
‘Part-year or part-time resident’ or ‘Resident as of April 30th or
April 30th to December 31st (or
wording indicating knowledge of the concept)
b) $45,000 (Canadian employment income) + $1,000 (dividend received while a
Canadian resident for tax purposes) = $46,000
c) The following items have been omitted:
Income from employment in Belgium prior to Allison becoming a
Canadian resident
Dividends received prior to becoming a Canadian resident
Birthday gift from parents is not taxable
Blooms: Apply
Blooms: Understand
Topic: 03-07 Resident
Individuals and Corporations
9. Answer
the following questions which pertain to the administration of the Canadian
Income Tax system.
1. Individuals (who do not carry on a business) must file an
income tax return for the most recent calendar year by which date?
2. Individuals who carry on an unincorporated business must file an income tax
return for the most recent calendar year by which date?
3. Who is responsible for the filing of a deceased taxpayer’s tax return?
4. What is the taxation year for an inter-vivos trust?
5. What type of trust is permitted to choose a non-calendar year for tax
purposes?
6. A trust must file an income tax return within how many days of its taxation
year?
7. What is the taxation year for a corporation (other than a professional
corporation)?
8. A corporation is required to file an income tax return within how many
months of its taxation year-end?
10.
April 30
2. June 15
3. The deceased’s legal representative
4. The calendar year
5. A testamentary trust that is designated a graduated rate estate
6. 90 days
7. A chosen fiscal period, not exceeding 53 weeks
8. 6 months
Blooms: Remember
Topic: 03-15
Administration of the Income Tax System
Topic: 03-16 Filing of
Returns
Chapter 05
Income from Business
Multiple Choice Questions
1. TriStar
Industries was recently denied the deduction of the life insurance premiums on
the life insurance policies of its key executives on its annual tax return.
Which of the following general limitations to business profit determination
best describes the reason for the Canada Revenue Agency’s decision?
A.Exempt-income
test
B. Personal-expense test
C. Insurance proceeds exemption
D. Reserve test
Blooms: Apply
Topic: 05-05 General
Limitations to Business Profit Determination
2. Which
of the following expenses would be denied as a deduction as per the provisions
of the Canadian Income Tax Act?
A.Maintenance fees on a yacht at Yellow Yacht Leasing Inc.
B. Legal
and accounting fees incurred during the construction of a building.
C. Advertising costs in a non-Canadian newspaper directed at an American
market.
D. Work space in a home used as a taxpayer’s principal place of business.
Blooms: Understand
Topic: 05-05 General
Limitations to Business Profit Determination
3. Sam
runs a proprietorship that generated $75,000 in profits in 20×0. Included in
these profits are: a) $10,000 – amortization expense; b) $5,000 – reasonable
bad debt expense; c) $55,000 – cost of goods sold (closing inventory at market
value); and $8,000 – meals and entertainment with clients. Sam’s capital cost
allowance has been accurately calculated at $8,500 for the year. How much is
Sam’s business net income for tax purposes?
A.$73,500
B. $75,000
C. $80,500
D. $89,000
$75,000 + $10,000 + $4,000 – $8,500 = $80,500.
Blooms: Apply
Topic: 05-02 General Rules
for Determining Business Income
Topic: 05-05 General
Limitations to Business Profit Determination
Topic: 05-06 Exceptions to
the General Rules
Topic: 05-12 Treatment of
Reserves
Topic: 05-20 Summary,
Conclusion, and Management Perspective
4. Joe
invested in a piece of land seven years ago when real estate prices were rising
in his area and land values were expected to double within five years. The land
remained vacant and was only used in 20×0 when Joe was approached by a
businessman to rent the land for two weeks for a local carnival for a fee of $1,000.
It is now 20×2 and Joe has been offered a significant sum of money for his land
in response to an advertisement he placed in a local newspaper. Based on Joe’s
primary intention for the land, the gain on the sale would be classified as
A.business
income.
B. property income.
C. a capital gain.
D. exempt income.
Joe’s intention at the time of acquisition was to earn a profit
on the value of the land.
Blooms: Understand
Topic: 05-01 Business
Income Defined
5. A
taxpayer recognized a $40,000 loss in 20×5 from her small farm (which was a
secondary activity to her full-time job as a dentist). What is the maximum
deduction that would be allowed from the farm loss for the 20×5 tax year?
A.$0
B. $17,500.
C. $21,250.
D. $40,000.
2,500 + ½ ($40,000 – 2,500) = $21,250. However, the maximum loss
allowed is $17,500.
Blooms: Apply
Topic: 05-14 Farming
Short Answer Questions
6. List
the six general limitations to business profit determination and give an
example for three of the items
(One example is given per item, however, students may choose
others.)
1. Income-Earning Purpose Test
Example-Expenses for a taxpayer’s hobby are not deductible if the taxpayer does
not have a reasonable expectation of profit from the hobby.
2. Capital Test
Example-Accumulated amortization for financial accounting purposes is not an
allowable deduction as it is on account of capital. However, CCA is allowed,
using the prescribed rates of the Income Tax Act.
3. Exempt-Income Test
Example-Premiums on a life insurance policy for a key employee are not
deductible since the proceeds are not taxable income.
4. Reserve Test
Example-Warranty expense is not an allowable expense for income tax purposes.
5. Personal-Expense Test
Example-Interest on the mortgage of a principal residence is not an allowable
expense as the home is for personal use.
6. Reasonableness Test
Example-$100 per hour paid to a small business owner’s child for wages when
comparable wages are $10 per hour may very well be deemed to be unreasonable,
and therefore, not an allowable expense.
Blooms: Apply
Blooms: Remember
Topic: 05-05 General
Limitations to Business Profit Determination
7. Ken
Gray runs a small proprietorship (Ken’s Fish) which specializes in fishing
gear. He has provided you with the following financial information pertaining
to his business:
|
Sales |
$150,000 |
|
Cost of goods sold* |
80,000 |
|
Advertising in a local paper |
1,000 |
|
Advertising in a U.S. newspaper
directed at Canadians living in the U.S. |
2,000 |
|
Meals and entertainment |
10,000 |
|
Property taxes on a vacant piece of
land (which earns no income) adjacent to the business |
2,500 |
|
Golf course fees for Ken |
1,500 |
|
Cost of one convention held on a cruise
ship in the Mediterranean Sea sponsored by a Canadian fishing association. |
2,000 |
(*All closing inventory is valued at market value.)
Required:
A) Calculate the net income for tax purposes for Ken’s Fish.
B) Explain why any items have been omitted.
C) Briefly discuss how your answer in A) would change if Ken had valued his
inventory at cost.
1. A)
|
Revenue |
$150,000 |
|
Cost of goods sold |
(80,000) |
|
Advertising |
(1,000) |
|
Meals and entertainment |
(5,000) |
|
Net income for tax purposes |
$ 64,000 |
67.
B) Omitted items:
Advertising in an American newspaper is not deductible when the
targeted market is Canadian. S.19
Half of the meals and entertainment are not deductible. S 67.1
Property taxes on vacant land is only deductible to the extent that income is
earned. S.18(2), (3) The amount can be added to the cost base of the land.
Recreational fees are not permitted as deductions. S.18(1)(l)
The convention is not within the territorial scope of the organization hosting
the conference, therefore, it is not an allowable deduction. S.20(10)
C) The Income Tax Act requires that closing inventories be valued
at either:
1) the lower of cost or market value of each item, or
2) the market value of all items of inventory.
Ken would need to value his inventory as per these provisions,
which could affect both cost of goods sold and net income for tax purposes.
Blooms: Analyze
Blooms: Apply
Topic: 05-02 General Rules
for Determining Business Income
Topic: 05-05 General
Limitations to Business Profit Determination
Topic: 05-06 Exceptions to
the General Rules
Topic: 05-07 Specific
Income Expense Exceptions
Topic: 05-08 Treatment of
Inventories
Topic: 05-20 Summary,
Conclusion, and Management Perspective
8. Alice
Smith has provided you with the following information pertaining to her 20×0
taxes:
· The financial statements for Alice’s dental practice report a
net income of $110,000.
· Amortization of $15,000 is reported in the expenses.
· Capital cost allowance has been accurately calculated at $12,500 and has not
been accounted for in the financial statements.
Alice conducted scientific research and experimental development
(SR&ED) in 20×0. $40,000 of her expenditures are qualified SR&ED
activities. These costs are currently reported as capital items on the balance
sheet.
· Alice raises sheep on her land at her home in the country. She has a farming
loss of $9,000 in 20×0.
Required:
Calculate Alice’s minimum net income for tax purposes for 20×0.
|
Business income |
$110,000.00 |
|
Add: |
|
|
Amortization (S.18(1)(b) |
$15,000.00 |
|
Less: |
|
|
Capital Cost Allowance (S.20(1)(a) |
($12,500.00) |
|
Less: |
|
|
SR&ED (S.37(1)) |
($40,000.00) |
|
Less: |
|
|
Farm loss (S.31) * |
($5,750.00) |
|
Net income for tax purposes |
$66,750.00 |
|
*Restricted to: |
|
|
$2,500 + ½ ($9,000 – $2,500) = $5,750 |
|
Blooms: Apply
Blooms: Understand
Topic: 05-02 General Rules
for Determining Business Income
Topic: 05-05 General
Limitations to Business Profit Determination
Topic: 05-06 Exceptions to
the General Rules
Topic: 05-07 Specific
Income Expense Exceptions
Topic: 05-10 Scientific
Research and Experimental Development
Topic: 05-11 Professionals
Topic: 05-14 Farming
9. Determine
whether the sale of the following items would be classified as a) income from capital for tax
purposes, b) business income for tax
purposes, or c) neither.
|
|
Transaction |
Income from Capital Property (indicate
with an x) |
Business Income (indicate with an x) |
Neither (indicate with an x) |
|
1. |
A furniture business sold its delivery
truck for a small gain. (No recapture or terminal loss arose from the sale.) |
|
|
|
|
2. |
A contractor constructed a house for resale,
which was then sold immediately on the market. |
|
|
|
|
3. |
LM Truck Dealer Ltd. sold a fleet of
new trucks to XYZ Mining Inc. |
|
|
|
|
4. |
Jean’s Coffee Shop Co. earned $1,000 in
dividends from shares in Bob’s Pastries Ltd. |
|
|
|
|
5. |
After ten successful years operating George’s Hotel Inc.,
George decided to retire, and he sold his shares in the company to an
arm’s-length party for a significant gain. |
|
|
|
|
|
Transaction |
Income from Capital Property (indicate
with an x) |
Business Income (indicate with an x) |
Neither |
|
1. |
A furniture business sold its delivery
truck for a small gain. (No recapture or terminal loss arose from the sale.) |
x |
|
|
|
2. |
A contractor constructed a house for resale,
which was then sold immediately on the market. |
|
x |
|
|
3. |
LM Truck Dealer Ltd. sold a fleet of
new trucks to XYZ Mining Inc. |
|
x |
|
|
4. |
Jean’s Coffee Shop Co. earned $1,000 in
dividends from shares in Bob’s Pastries Ltd. |
|
|
x |
|
5. |
After ten successful years
operating George’s
Hotel Inc., George decided to retire, and he sold his shares in
the company to an arm’s-length party for a significant gain. |
x |
|
|
Blooms: Understand
Topic: 05-01 Business
Income Defined
10.
KM Ltd. is a Canadian-controlled private corporation, operating
a small gift store in Vancouver. The company has a December 31st year-end. KM’s
financial statements reported net income before taxes of $210,000 in 20×0.
Financial information relating to 20×0 is as follows:
Land adjacent to the gift shop was purchased with a $75,000 bank
loan during the year to allow for an outdoor sales area during warm weather.
Interest expense on the loan for the year was $9,600, and the appraisal fee to
finance the loan was $1,000. Both the interest and the appraisal fee were
expensed by KM in 20×0.
The company hired a contractor to landscape the land. The $5,000
bill for the landscaping was paid in full during the year and capitalized on
KM’s Balance Sheet.
During the year, a new display case worth $2,000 was purchased
and expensed on the books.
Amortization expense of $21,000 was deducted during the year.
Total CCA (following any adjustments) for the year was $16,000 and is not
reflected in the financial statements.
The following were also expensed during the year:
|
Meals with clients |
$1,400.00 |
|
Snow removal service |
$1,000.00 |
|
Golf dues for employees |
$5,000.00 |
|
A reasonable reserve for bad debt |
$2,000.00 |
On December 30th, KM’s president announced a bonus to be paid to
the company’s key employee in the amount of $5,000, which was expensed on the
books that day. The employee will receive the bonus in 20×1 in equal payments
of $2,500, to be issued on January 30th and July 30th.
Required:
Determine KM Ltd.’s net income for tax purposes for 20×0.
|
Net income from financial statements |
$210,000.00 |
|
Add: |
|
|
Amortization S.18(1)(b) |
$21,000.00 |
|
Display cases (capital item) S.18(1)(b) |
$2,000.00 |
|
Financing costs S.20(1)(e) 4/5 × 1,000 |
$800.00 |
|
Meals (1/2) S.67.1 |
$700.00 |
|
Golf club dues S.18(1)(l) |
$5,000.00 |
|
Bonus payment (July 30) S.78(4) |
$2,500.00 |
|
Subtract: |
|
|
Landscaping S.20(1)(aa) |
-$5,000.00 |
|
CCA S.20(1)(a) |
-$16,000.00 |
|
Net income for tax purposes |
$221,000.00 |
Blooms: Apply
Blooms: Remember
Topic: 05-02 General Rules
for Determining Business Income
Topic: 05-05 General
Limitations to Business Profit Determination
Topic: 05-06 Exceptions to
the General Rules
Topic: 05-07 Specific
Income Expense Exceptions
Topic: 05-13 Unpaid
Remuneration
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